It’s just a month to the end of FY 2017-18. Your employer is asking you to submit proof of tax-saving investments and expenses. Your Company’s accounts department has been computing taxes on your salary since April 2017, based on the proposed investment declaration, you had submitted. Now, it's time for you to submit actual proof of investment, as per the investment declaration you had made.
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It's a popular habit for the citizens of India, mainly the youth, to make tax-saving investments, especially in the month of February and March. Certain eligible investments like ELSS, PPF, premiums paid on life insurance plans and some other investments, enjoy a tax deduction under Section 80C, up to Rs 1.5 Lakhs a year.
1. Mistakes made while availing life insurance to save tax
Many citizens invest in life insurance, mainly endowment life insurance plans to save tax, as these plans enjoy a tax deduction on premiums paid, up to Rs 1.5 Lakhs a year under Section 80C. There's a big reason for this. Endowment life insurance plans are heavily marketed by life insurance agents. The premiums are high and life insurance agents get big commissions for promoting and selling these plans.
Clever life insurance agents promote these plans telling citizens, you have very less time left to save taxes. Invest in Endowment life insurance plans and save up to Rs 1.5 Lakhs a year. What these life insurance agents don't tell you is they get commissions in excess of 30% on the first premium of the endowment life insurance plan, if it has a premium paying term of 10 years or more.
You must first answer this question? Why do you invest in life insurance plans? Is it not for risk protection? Don't you want your loved ones to have enough money to lead a comfortable life, if something untoward happens to you? This is where you need a term life insurance plan. This is a pure risk protection plan, where if you meet an untimely end within the term of the plan, your loved ones get the death benefit. The premiums on this plan are quite low.
If you avail endowment life insurance plans, you pay very high premiums each year, which only benefits the insurer. The life insurance agents pocket high commissions, especially in the first year of the plan. The life insurance agents promise you high maturity benefits when the endowment plan matures, but a simple back of the hand calculation shows you, returns of just 5-6% if continued till maturity. You get higher returns if you invest in tax saver FDs or a PPF.
Take a look at the biggest mistake made, if you invest in an endowment life insurance plan just to save tax. An endowment life insurance plan has very low mortality cover. If something happens to you, the money your family gets, will not be enough to meet expenses. You get stuck with this endowment life insurance plan and if you surrender it, you lose out on the tax benefits. The surrender value you get will be much lesser than the premiums paid and you stand to lose heavily.
Always avail life insurance to protect your family in your absence and not as an investment. There are plenty of tax saving investments which give higher returns if that is what you want.
You visit your bank branch and the bank officer suggests you invest in a tax-saver FD to save taxes. The officer says, you get a tax deduction up to Rs 1.5 Lakhs a year under Section 80C, if you invest in a tax-saver FD. Do you know that a tax-saver FD has a 5-year maturity? Also, the interest you get is lesser than a normal FD.
Before investing in a tax-saver FD, decide if this is the best investment to help you save tax. Are you willing to stay invested for 5 years? Also, the interest earned is taxable.
Maybe, you could look at investing in a PPF. You are offered a higher interest than a tax-saver FD and this investment enjoys EEE benefits. The amount you invest enjoys Section 80C benefits, while the interest earned and the amount at maturity is tax-free. Do remember, PPF has a 15 year lock-in.
Of course....You cannot think clearly if you rush to invest just to save tax at the last minute. It is most likely that you will invest in the tax-saver FD on the advice of the bank officer, even though it doesn't match your needs and suffer the consequences.
Always remember that your tax-saving investments must be in-line with your portfolio. Let's say you have invested heavily in equities in your portfolio. Your portfolio is in urgent need of an investment in fixed income. If you are looking to save tax, invest in a PPF.
Now, an ELSS invests most of your money in stocks. Yes...This is a heavy investment in equities. Your money is locked for 3 years. ELSS is an excellent investment for the youth in India. Many youth love to take risk in investment and ELSS gives high returns, but at high risk. Also, ELSS is quite safe as it forces you to stay invested for 3 years and equity is known to be safe, if you are a long-term investor.
But, in your case, an ELSS investment does not match your portfolio needs. Your portfolio needs fixed income like an investment in PPF and not equity. What if your portfolio has a lot of fixed income like PPF, NSC or Tax-Saver FD? Do consider an investment in ELSS to save tax as equity can increase your returns if you are willing to bear extra risk.
So what have you learnt from these examples? People no matter who smart they are, get fooled when it comes to investing to save tax. They rush to invest at the last minute, which is the end of the Financial Year and this plays into the hands of unscrupulous people like some life insurance agents.
If you leave tax-saving investments to the last minute, you won't have the time to make a proper decision or you will be left with few investment options. You will be fooled into making tax-saving investments which don't match your financial needs or worse, which work in the opposite direction to your needs.
Every year the month of March sees the highest number of investments in tax planning instruments. The Government of India has steadily being reducing PPF interest rates and now it is 7.6% for January - March 2018. Endowment life insurance plans give returns of just 5-6% if you stay till maturity. Still, many young citizens rush to invest in PPF and avail endowment life insurance plans at the last minute, without understanding them or even why they are investing. Not much has changed and citizens still rush to invest in tax saving instruments at the last minute. Be Wise, Get Rich.
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